Why the Rich Should Call for Income Redistribution
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The Fiscal Times
July 29, 2014

After the craze over Thomas Piketty’s Capital in the Twenty First Century, nobody should be surprised to learn that inequality has been increasing over the last several decades. The question is what to do about it.

One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. There are no signs at all of internal mechanisms within capitalists systems that automatically move us toward an equitable income and wealth distribution, and if Piketty is correct we need to worry about the opposite – that increasing inequality is an inherent feature of capitalist systems.

Those who argue rising inequality isn’t actually a problem, a claim often made by those at the top of the income and wealth distributions who are fearful that any attempt to correct the disparities will mean they pay more in taxes, are taking a large risk. If inequality continues to rise, as it almost surely will if we do nothing about it, more and more people will come to believe the system is unfair and eventually we will hit a dangerous tipping point for society. Once that happens, those at the top will be lucky if the social changes are limited to income and wealth redistribution.

Related: What Piketty Left Out of His Inequality Argument

The other answer is to try to do something to reverse the trend toward rising inequality by either increasing the growth rate of income and wealth for those who have lagged behind, or slowing the growth rate for those at the top. Ideally, we would use policies and programs that enhance income and wealth growth rates for those who have lagged behind without affecting the growth rates of those at the top, but as explained below that may not be possible.

Even if we can find a way to stabilize the distributions of income and wealth at tolerable levels, that is not enough. If the same groups of people always end up at the top and bottom of the income and wealth distributions with little mobility between groups, then the problem of inequality will remain. Thus, we also need to ensure that the chance of any individual in society ending up at a particular place in the income and wealth distributions is equal, or at least more equal than it is now. That is, we need to address the problem of unequal opportunity.

Most people agree with this approach to solving the inequality problem. Of course we want to find a way for those who have fallen behind to do better, and to equalize opportunity. That is, they agree so long as it doesn’t involve the redistribution of their own income, wealth, or opportunity. If it means they have to pay more taxes, or give up the exclusive opportunities their children have to access the best educational institutions (whether or not they are the most qualified), social networks, and so on, then they will do their best to resist.

Related: Get Used to It--The Rich Do Get Richer

But here’s the thing. We are not going to be able to solve the problem of inequality in income, wealth, and opportunity without some degree of redistribution. Solving the problem will require those who have gained the most in our economic system to pay more in taxes to help those who, despite their hard work and rising productivity, have not been able to keep up. And those taxes can be used in one of two ways. They can be given directly to the less fortunate in the form of cash transfers of one sort or another through various social programs, or they can be used to make investments that help people permanently elevate their standard of living.

If we make the necessary investments, for example if we make it possible for students to get a college education without taking on crushing levels of debt, provide pre-school for all, implement infrastructure and transportation changes that allow those in poor areas to access a wider array of jobs, and so on, there’s a chance some of the redistribution will be temporary. Once we “prime the pump” through the proper investments, and that includes adequate social insurance, the middle and lower classes will be elevated to the point where growth in income and wealth become self-sustaining and we won’t need to invest as much. But even if the investment is more permanent, at least we will be helping people to help themselves.

The alternative to using tax revenue to invest in areas that assist those whose incomes have stagnated in recent decades is to use direct cash transfers to reduce inequalities to tolerable levels. But this is much more likely to produce resentments from those who pay the taxes, and hence harder to sustain in a system where politicians are so easily captured by wealthy interests. Redistributive cash transfers are a less desirable way to address the inequality problem in any case, except to the extent that they return income that should have gone to the middle and lower classes to begin with. Some redistribution of this type will always be needed, perhaps a substantial amount, but it should be minimized as much as possible through investments that elevate the fortunes of the middle and lower classes.

If inequality continues to rise, and there’s no sign of it abating, then the redistribution of income, wealth, and opportunity will happen one way or the other. The only question is what form it will take and how permanent the redistribution programs will be. Thus, the rich and the powerful – those who have so much influence over our politicians – have a choice to make. They can bury their heads in the sand and pretend that inequality does not exist, isn’t a problem if it does exist, and will take care of itself in any case as they try to hold onto their wealth and power. But that risks an eventual popular uprising that forces redistribution upon them in a form they will not much like. Or they can recognize that something needs to be done sooner rather than later, and support the needed investment in the middle and lower classes that will make it possible for them to gain a larger and more equitable share of the income and wealth they work so hard to produce.

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University of Oregon macroeconomist Mark Thoma writes primarily about monetary policy its effect on the economy. He has also worked on political business cycle models. Thoma blogs daily at Economist’s View.